While highlighting that Guyana’s fiscal policy has been appropriately supporting growth and “considerably” reducing the fiscal deficit, the International Monetary Fund (IMF) has called on the government to gradually reverse tax subsidies aimed at easing the cost of living.
The IMF said that Guyana’s 2022 budget has reduced current expenditures by about 1% of non-oil GDP compared to 2021, adding that it maintains support for pandemic-related health expenditures. It noted that while cash transfers to households implemented earlier in the pandemic to mitigate the impact of the lockdowns are not permanent, additional measures have been implemented to mitigate the impact of rising commodity prices on households.
While the fiscal balance is still expected to record a small deficit, the public debt ratio is expected to decline, given the large increase in the nominal GDP, IMF notes.
Nevertheless, the financial institution warned that it is important to maintain a prudent fiscal policy. On that note, it recommended that the government reverse measures aimed at easing the cost of living owing to the pandemic and a number of other external factors.
“[IMF] Staff broadly supported the authorities’ measures to temporarily ease the burden of higher global commodity prices on the most vulnerable groups of society, given the absence of adequate safety nets. Since tax measures are poorly targeted tools, staff recommended a gradual unwinding of the general subsidies provided through the tax system and moving to full pass-through of international prices to domestic prices since the shock does not appear to be temporary, and therefore other forms of government support are more appropriate. This should be done simultaneously with measures to further develop and strengthen a well-targeted social safety net system.
“In addition, a sustainable and feasible increase in capital spending to support the transformation of the Guyanese economy is needed, but within a framework that does not generate macroeconomic imbalances. Moreover, the debt to the central bank incurred while monetizing the deficit during 2015-mid 2021 needs to be drawn down,” IMF said in its report on Article IV consultations with Guyana.
Since taking office in 2020, the Irfaan Ali-led government has implemented a number of measures aimed at easing the effects of the COVID-19 pandemic and the rising cost of living. In the 2022 budget, some $5 billion was set aside to be used in the implementation of measures to cushion cost of living.
Across the globe, there has been steep increases for commodities as a result of the COVID-19 pandemic, associated global supply chain bottlenecks and more recently the war between Russia and Ukraine.
Among the measures implemented by the Ali regime, were the manifesto promise of removing VAT from water, electricity and data services along with some everyday commodities, fuel lubricants and construction materials. The government also announc-ed that it will be supporting construction of homes through the handout of steel and cement.
Government has also granted one-off cash grants to sections of society, such as farmers, fishermen, persons with disabilities, and hinterland and riverine households, among others.
Farmers also benefitted from free fertilizer from government, a move government said that was necessary to keep food production low. Additionally there has been the creation of some 11,000 part-time jobs across the coast and an additional 3,000 will be added shortly.
Government has also reduced the excise tax on fuel from 35% to 0% as a means of cushioning the rising fuel costs.
It is unclear whether the government will follow the advice of the IMF and reverse the measures but it has not yet signalled any intention to do so.
Growth and medium-term fiscal framework
Additionally, the IMF said that with Guyana’s financial sector expected to grow in tandem with the economy, it is important that financial stability is maintained.
Capital spending, by government, has been ramped up to support the non-oil economy.
However, the IMF said that given implementation capacity constraints, an execution rate of around 70% of the 2022 capital budget is expected. That number represents a 2.5% increase in a non-oil GDP. Oil revenue, transferred to the budget in line with the NRF Act, is projected to increase sharply and as a result, the overall fiscal deficit is expected to decline significantly to 1.75% of non-oil GDP from 10.5% of non-oil GDP in 2021.
IMF has identified that the country still lacks a medium-term fiscal framework which is necessary to curb macroeconomic imbalances.
IMF’s report on 2022 Article IV consultation, released on Tuesday, said that Guyana’s fiscal policy in 2022 has been appropriately supporting its growth but warned that better management practices are needed, particularly relating to the Natural Resources Fund (NRF).
Currently, as of September 29, the NRF had a balance of over US$1 billion.
The IMF noted that while the government strengthened the NRF Act at the end of 2021, the amendments do not provide an effective fiscal anchor, adding that “Guyana still lacks a medium-term fiscal framework.” Based on the experiences of other oil-producing countries, the IMF warned that a lack of a framework results where annual budgets are developed within a medium-term plan often results in major macroeconomic imbalances.
“A fiscal framework that constrains the annual non-oil overall fiscal deficit (after grants) to not exceed the expected transfer from the oil savings fund will anchor fiscal policy in the short term in Guyana and ensure that fiscal spending increases at a measured pace to address development needs without resulting in macroeconomic imbalances, including a loss of competitiveness and an appreciation of the real exchange rate due to an increase in non-tradeable prices,” the IMF report stated.
The report and its findings are a result of a visit by the Article IV mission to Guyana back in June. The team was led by Alina Carare (then incoming mission head) and Meredith McIntyre (outgoing mission head), who held virtual discussions from May 18 to June 1. Missions are undertaken as part of regular consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The team had met with Finance Minister Dr Ashni Singh, Minister of Parliamentary Affairs and Governance Gail Teixeira, Central Bank Governor Gobind Ganga, other senior officials, representatives from the private sector, banks, the opposition party, labour unions, and other stakeholders, including Guyana’s international development partners.
The IMF report informed that the mission recommended “that a zero overall fiscal balance anchor should be supported by a medium-term expenditure framework, with current expenditures mostly growing in line with non-oil GDP and growth of capital expenditures being guided by absorptive capacity constraints.”
It added “…the medium-term framework presented in this report is consistent with achieving a zero overall fiscal balance target by 2025. Moreover, to serve effectively as a fiscal anchor a zero overall fiscal balance target needs to be complemented by a rigorous analysis and supplemented with changes if needed to the transfers rule set under the NRF, and an operational target for the non-oil balance.”
The IMF said that the NRF transfer rule needs to ensure that transfers to the budget are optimally set to ensure intergenerational equity and long-term sustainability, noting that that would also allow a sufficient build-up of savings in the NRF for Guyana to be able to reap the full benefits of its natural resource wealth. It further advised that a clear operational target for the non-oil balance is needed to achieve the outlined objectives of the fund. The IMF said that the clear operational target should be accompanied by measures that help mobilize non-oil revenues and contain the wage bill and non-current spending, to ensure that medium-term consolidation is not driven mostly by oil revenues which could be volatile.
The IMF Executive Board, which reviewed the report before approval, commented that while Guyanese authorities are strongly committed to fiscal prudence and meeting critical developmental needs, they also understand that containing the fiscal position over the medium term is crucial in anchoring fiscal policy in a sustainable way. The Guyanese authorities agreed that the new framework strengthens the fiscal prudence of the existing system, noting that this will ensure that scaling up public investment to address Guyana’s infrastructure and human development needs is as rapid as feasible, without generating macro-economic imbalances.
“Consistent with the amended NRF Act, the authorities are committed to conducting periodic reviews of the oil transfer rule, which would be helpful in ensuring the long-term sustainability of the NRF and intergenerational equity,” IMF said.
In July, the Government of Guyana announced that it made a second withdrawal of some US$200 million from the Natural Resource Fund (NRF) in accordance with the Natural Resource Fund (NRF) Act 2021.
This announcement was made by Senior Minister within the Office of the President with responsibility for Finance, Dr Ashni Singh. He informed that pursuant to Section 16 of the NRF Act 2021, a further US$200 million equivalent to $41.6 billion has been transferred from the NRF to the Consolidated Fund “to finance national development priorities.” This transfer, the Ministry noted, was made in accordance with the strengthened legal architecture of the NRF Act 2021.
The release reminded that in May of this year, government made its first withdrawal of US$200 million (equivalent to $41.7 billion). This brings the accumulated withdrawals to date from the NRF to US$400 million (equivalent to $83.3 billion).
The NRF Act 2021 came into operation on 1st January 2022, and as part of the Budget 2022 process, Parliamentary approval was granted for a total of US$607.6 million to be transferred during the fiscal year 2022, the release added.
The government has consistently said that withdrawals from the NRF are not assigned to fund specific projects rather it is added to the consolidated fund.
